A-REIT – CIMB

Business Park blues overdone but few catalysts

An unprecedented supply of new business-park space is anticipated in the next four years. While there could be some pressure on AREIT’s business parks, we believe fears may have been overdone.

We maintain our estimates and DDM target price (discount rate 8.6%) but downgrade AREIT to Neutral from Outperform in view of limited catalysts. We advocate a switch to CCT at a cheaper 0.7x P/BV with similar yields (6%).

61% of supply pre-committed

We anticipate almost 7m sf of new business/science park space between 2012 and 2015. Almost 40% of this should be completed in 2012. There are some doomsday forecasts in the market, which we believe are over pessimistic. For the whole 7m sf of new supply, pre-commitment is 61%. For the 2.8m sf of new space completing in 2012, 68.5% has been pre-committed.

Demand looks positive, still

Net formation of companies that are likely to take up space at business/science parks (manufacturing information & communication, financial & insurance, professional scientific & technical activities, and arts & entertainment) is still positive, auguring well for take-up of business-park space.

Low rents of single-user and BTS buildings to offer buffer

AREIT’s fairly high weighted average rent of S$4.22 is skewed by unusually high rents from its Telepark data centre which has high specifications. If we exclude this, rents for its single-user space would range between S$1.25 and S$2.39psf; multi-user space between S$1.83 and S$3.85psf. On a weighted average basis, gross income from buildings with average rents below S$2.75psf contributed 40% to its gross income in FY11. We believe the pockets of low-based rents in its portfolio provide a safety net for possible negative rental reversions.